Basis, That is the Question! If Not Now, When?|
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The Consolidated Appropriations Act of 2020 (CAA) provided clarification and delivered welcome news for owners of pass-thru entities (S corporations and LLCs/partnerships) who have taken advantage of the CARES Act Paycheck Protection Program (PPP) loans program and anticipate their loan will be forgiven.
As tax professionals, we are watching closely as this new legislation passes and realize there are several questions that must be addressed before your 2020 tax returns can be filed.
The question for owners of pass-through entities who received PPP loans is not if, but when they will receive basis increases resulting from the debt forgiveness! While this question needs to be answered for each pass-through entities’ tax return to be prepared, it is critical for those who have losses in 2020 and whose owners need a basis to deduct those losses.
The question goes to the timing of the basis increase.
Which of these points in time will the forgiveness become considered for income tax purposes, to be tax-exempt income, and thus increase basis?
- When the debt is forgiven by the lender?
- When the company records the forgiveness for financial reporting purposes?
- When the company applies for forgiveness with the lender?
- When, as discussed in IRS Rev. Rul. 2027-27 (which we expect to be discarded by the IRS) the company spends the monies on permissible expenses that they reasonably expect will lead to forgiveness?
- Will this differ for an accrual versus cash basis taxpayer?
For further details refer to the article we published on 12/20/20, Tax Implications of PPP Funds Finally Align with Congressional Intent.
The bottom line
The CAA specified that eligible expenses paid using PPP funds are fully deductible and stated that “no basis increase shall be denied, by reason of the exclusion from gross income,” meaning PPP forgiveness will INCREASE basis.
It is possible that the IRS may issue some guidance, in the form of either Q&As, Revenue Rulings, or subsequent Notices.
Aprio has established a dedicated PPP loan forgiveness team that is continuously monitoring new guidance from the SBA, as well as the Treasury, Congress and the IRS, to ensure we have the latest information when advising our clients.
As always, your Aprio team is here to support you and your company around PPP and PPP tax related matters. Connect with your Aprio advisor or reach out to us for more information on how we can help.
Disclaimer for services provided relative to SBA programs and the CARES Act
Aprio’s goal is to provide the most up to date information, along with our insights and current understanding of these programs and regulations to help you navigate your business response to COVID-19.
The rules regarding SBA programs are constantly being refined and clarified by the SBA and other agencies In certain instances, the guidance being provided by the agencies and/or the financial institutions is in direct conflict with other competing guidance, regulations and/or existing laws.
Due to the evolving nature of the situation and the lack of final published rules, Aprio cannot guarantee that additional changes or updates won’t be needed or forthcoming and the original advice given by Aprio may be affected by the evolving nature of the situation.
You need to evaluate and draw your own conclusions and determine your Company’s best approach relative to participation within these programs based on your Company’s specific circumstances, cash flow forecast and business strategy.
In situations where resources are provided by third parties, those services should be covered under a separate agreement directly with that service provider. Aprio is not responsible for the actions of any other third party.
Aprio encourages you to contact your legal counsel to address the legal implications of the impact of the CARES Act and specifically your participation in any of the SBA programs.